Cable M&A

Comcast Makes a Big Show of Shedding Cable-TV Subscribers

Attention, millions of cable subscribers: Get ready to become customers of SpinCo.

As part of Comcast’s (CMCSA) effort to win regulatory approval for its purchase of Time Warner Cable (TWC), the nation’s largest cable operator is selling 1.4 million subscribers to rival Charter Communications (CHTR), and the two companies will swap another 1.6 million. Atop all that, Comcast and Charter plan to spin off a new firm—dubbed SpinCo, for now—into a publicly traded cable operator with 2.5 million customers from Comcast’s former system, concentrated mainly in Alabama, Indiana, Kentucky, Michigan, and Minnesota. Among the larger cities moving to the new company will be Birmingham, Detroit, Indianapolis, Louisville, and Minneapolis-St. Paul.

The deals have been engineered with tax and operating efficiencies in mind, company executives said today on a conference call. For Comcast, the divestments are also designed to demonstrate to regulators that the cable giant stands willing to negotiate—to a point—on terms to make its deal for Time Warner Cable more palatable. Several consumer groups and Netflix (NFLX) oppose the deal.

Charter will operate the new company and receive a service fee for doing so. Comcast shareholders will have six independent slots on SpinCo’s nine-person board, with Charter choosing three (including Charter CEO Tom Rutledge, who will become non-executive chairman of the new company). In the sale part of this tripartite transaction, Charter will pay $7.3 billion cash for 1.4 million Time Warner Cable subscribers. The swap involves an effort to give each company a greater concentration of business in areas it values, such as Comcast strengthening its position in Boston and Los Angeles. Comcast will net about $5 billion cash from the transactions.

The deal is conditioned on federal and state regulators approving the Time Warner Cable sale, and would make Charter the nation’s second-largest cable operator with 8.2 million video subscribers under management. The new SpinCo will remain a separate entity for four years, at which time its board could decide to sell—and in a consolidated industry landscape, it’s easy to envision Charter making a bid to fold the company into its existing national market. Neither company was asked about that possibility on a conference call Monday morning. “I think we’ve got a big runway ahead of us,” Rutledge said.

Comcast spokesman John Demming said there have been no formal names suggested yet for SpinCo or a decision on where the company will be based.